Investors reject BHP deal, hunt for value elsewhere

Shares of mining giant BHP Billiton fell 4.6 percent in Australia trade on Wednesday, a day after the group announced plans to spinoff businesses worth around $16 billion, but held off on a potential share buyback which left investors unnerved.

Its London-listed shares also tumbled to finish 4.9 percent lower on Tuesday.

Year to date, BHP Billiton shares are still up 5.1 percent but after the share buyback that was set to pay investors around $5 billion failed to materialize, investors are looking at other opportunities in the sector.

"First of all it was a miss in terms of profit – second in terms of cost cutting, if you compare to Rio Tinto, it is nowhere near Rio in terms of the amount of cost cutting they could do," portfolio manager at Sturgeon Capital, Yannick Naud told CNBC.

The planned demerger will leave BHP Billiton almost exclusively focused on four main "pillars" – long-life iron ore, copper, coal, petroleum – and potentially potash basins which will spur cash flow growth and boost returns, the group said.

"People are asking now, is this creating value for shareholders? You don't want a corporate transaction that you don't understand and don't quite know what you're getting out of it," said fund manager at 7 Investment Management Ben Kumar.

The new spin-off company, named NewCo, will be headquartered in Perth and listed on the Australian stock exchange with a second listing in South Africa. The business will combine aluminium, coal, manganese, nickel and silver assets and will be managed separately.

BHP Billiton shareholders will receive shares in the new company on a pro rata basis.

"We knew there would be a spin off; we knew that the focus of today would be capital return. I think the market is disappointed by the fact there is no announcement of share buy-back. But in terms of efficiency, in terms of being a lower cost producer, Rio Tinto is ticking all the boxes," he said.

U.K. fund manager Mike Felton said he has struggled to find value opportunities in the U.K. market this year but Rio Tinto has been among the fund's best performers this summer

"As a low-cost producer of iron ore, Rio is currently benefiting from robust prices," he said.

After the success of Rio, Felton recently added to his stake in BHP Billiton, as he sees the sector as attractive as firms continue to cut costs.

Gold miners

Gold miners have rallied 26 percent since the start of the year, with gold mining stocks trading at a 58 percent discount to 2011 levels according to ETF securities.

Historically, the third quarter has been a strong period of performance for gold miners given the seasonality of gold demand, the group said, who see now as a good time to raise exposure to the sector.